TINA and GRIDLOCK
November 5, 2020
–The new post-election narrative is that stocks LOVE gridlock. Nasdaq futures continue to soar, up over 300 as of this writing. From Oct 13 high over 12200 in NQZ to the Nov 2 low below 11000… that 10% decline has nearly been erased in a couple of days with NQZ now 12070. The all-time futures high is 12444.75 on Sept 2. Other products are also breaking out to new recent highs, including bitcoin near 15k and soybeans, with S F1 over 1100, having been at 880 as recently as August. The US dollar index is pressing lower in front of today’s FOMC meeting as the election spectacle drags on.
–I suppose we are once again left with TINA as the investment theme of sophisticated wealth managers. The reflationary growth story had the wind knocked out of it. Ten year tip breakeven fell over 7 bps to a new monthly low of 164.8 bps.
–Yields tumbled, with tens plunging 11.6 bps to 76.8. Curve flattened, with 2/10 down 9.3 to 62.5, and 5/30 down a more manageable 3.8 to 122.6. The red euro$ pack (2nd year forward) rose 2.75 bps, while golds (fifth year forward), leapt 12.25 bps.
–Breathtaking implied vol crush across products. VIX was over 40 last week but fell yesterday to 26.49. In rate products, longer maturity premium evaporated. For example, on Tuesday morning the TYZ atm straddle was 1’22 (138.25 strike). Yesterday, the TYZ atm straddle settled 0’53 (139 strike) while the Jan 138.5 straddle settled 1’24. One month of time value erased overnight. USF 173^ from 5’53 settle to USF 176^ 4’32 settle, a premium compression of nearly 25%.
–Here are a couple of examples of declines in midcurve straddles: 2EM 9962^ 21.0 on Tuesday settle vs 9960, down to 18.5 for same strike yesterday vs 9965. 3EM 9937^ 34.5 vs 9936.5 on Tuesday; yesterday 9950^ vs 9946.5 at 28.0. (3EM 9937^ settled 30.0).
–Not much the Fed can do here besides instructing the desk to keep inhaling treasury supply at the same pace (or faster). Auction refunding announcement yesterday: record $122 billion with $54b 3’s, $41b 10s and $27b 30s.
